1. Field of the Invention
The present invention relates generally to general corporate insurance systems and more particularly to the processing, valuation, and charging for financial instruments to protect equity investments.
2. Related Art
The liability system in the courts of the United States and many other industrialized countries has all but gone out of control from the point of view of insurance companies. The perceived problem is that most kinds of liability problems have turned into the something resembling a lottery. Judgments are on the rise and forum shopping by plaintiffs is becoming more aggressive.
The basic structure of corporate liability insurance is to place a barrier out in front of the corporation that is so large that no liability can pierce it or get around it and affect the corporation. The difficulty with this approach is (1) when the protection is defined by the potential size of the exposure, it creates a target that is worth more effort to pursue by plaintiffs, and (2) the cost of protection is dictated by the size of the largest possible risk rather than by the size of the asset bing protected.
Many assets of the corporation are generally impractical or impossible to attach by a judgment. For example, the main assets of a limited liability law firm are know-how and a customer list. In the case of a one hundred million dollar judgment against that firm, the plaintiff will never get the value of the company""s knowledge of the law, client base or goodwill. The judgment will realize only the liquidation value of the firm (e.g., the sale of its tangible assets).
In order to protect against certain liabilities (e.g., EandO, or errors and omissions liability), many companies forecast the largest plausible amount any plaintiff might sue them for, and then buy an insurance policy for that amount. By doing so, the company creates a situation in which it makes economic sense for a plaintiff law firm to invest more of its own time and effort in an attempt to win a judgment against the company and its insurance carrier(s). The firm creates a deep pocket. The deeper the pocket becomes, the more attractive it is for plaintiff""s attorneys to put forth the effort to reach into that pocket on a contingency fee basis. The insured, by acting in this manner forgoes most of the protection provided by (1) doing business in a corporate form, (2) limitations on the execution of judgements, and (3) debt protection provisions in insolvency and other statutes.
Some existing systems address part of the problem by insuring against vicarious liability. For instance, a system exists for protecting the equity investment of a venture capital (VC) firm. The system helps VC firms to deal with the possibility that vicarious or participatory liability is alleged when a firm it has invested in is sued. This system of providing coverage against liability for the venture capital firm, the directors and partners all in the same policy. In that sense, it addresses one of the above concerns, namely it protects the wealth of the investor in the entity. However, because it is all one policy and paid for and owned by the VC firm, in the event of a large loss, the policy""s limits are exhausted by the VC firm""s liability and the partners of the firm are left with nothing. More specifically, this VC protection system is a policy that belongs to the entity against which liability is sought. The policy is paid for by the entity against which liability is sought. And like all liability policies, it relies on size alone for completeness of protection, rather than on the nature of its assets, restrictions on executions of judgment and bankruptcy.
What is needed is a system of protection the is separate from the system that protects the entity and provides coverage for the investments of equity owners of the entity.
The present invention is directed to a system, computer program product and business method for providing an investor with financial protection against a loss in value in an investment in a limited liability entity arising from an event against which the entity is inadequately insured or has no insurance.
One embodiment of the present invention comprises the steps of determining the amount of primary insurance that the entity has and the scope of its coverage. This amount drives the basis for the additional financial protection of the equity (i.e., the investor or shareholder""s value in the investment). The next steps can include determining the amount of working capital required to reestablish the entity, determining the investor""s basis in the investment, and determining the free cash flow of the entity. A maximum level of coverage can then be determined based on the working capital amount, the basis, or the free cash flow amount. Then a premium charge can be determined for a desired insurance amount in excess of the primary insurance. The desired insurance amount is equal to or less than the maximum level of coverage for the relevant risk classification.
In another embodiment, the present invention provides an investor with financial protection against a loss in value in an investment in a limited liability entity arising from an event against which the entity has not obtained insurance. This embodiment involves determining the amount of working capital required to reestablish the entity, or determining the investor""s basis in the investment, as well as determining the free cash flow of the entity. The marked-to-market tangible net worth of the entity is also determined. Based on this data a maximum level of coverage can be determined. Then a premium charge for a desired amount of insurance is computed. The desired amount is equal to or less than the smaller of the amount of working cap, the basis, or the maximum level of coverage for the relevant risk classification.
In a further embodiment, the present invention provides an investor with financial protection against a loss in value in an investment in a limited liability entity arising from events against which the entity is inadequately insured, and/or events against which the entity has not obtained insurance. As in the first embodiment, this further embodiment includes determining the amount of primary insurance that the entity has, the scope of its coverage and its limits. The working cap required to reestablish the entity, the investor""s basis in the investment, the risk classification of the entity, the marked-to-market tangible net worth of the entity, and the free cash flow of the entity are also determined. The maximum level of coverage can then be determined using various combinations of this data. For risks in which there is primary insurance, a first premium charge in excess of the primary insurance for the relevant risk classification can be determined based on an amount equal to or less than a smaller of the working capital, the basis, and the maximum level of coverage. On risks for which there is no insurance, a second premium charge can be determined for insurance in an amount equal to or less than a smaller of the working capital, the basis, and the maximum level of coverage.
In a still further embodiment, the present invention provides an investor with financial protection against a loss in value in an investment in a limited liability entity arising from an event against which the entity is inadequately insured. As in the first embodiment, this still further embodiment includes determining the amount of primary insurance that the entity has, the scope of its coverage and its limits. The working cap required to reestablish the entity, the investor""s basis in the investment, the risk classification of the entity, the marked-to-market tangible net worth of the entity, and the free cash flow of the entity are determined. The maximum level of coverage can be determined using various combinations of this data. According to this embodiment, an amount (D) equal to or less than the smaller of the working cap, the basis, and the maximum level of coverage can be determined. Finally, consideration for an option to put the investor""s equity in the investment for the amount D is determined by computing an amount for risks in excess of the primary insurance for the relevant risk classification, and an amount for risks for which there is no insurance.
Further features and advantages of the present invention, as well as the structure and operation of various embodiments of the present invention, are described in detail below with reference to the accompanying drawings.